The Inside Scoop On Friday’s Pullback

The big news last week was Friday’s March payroll report, and I must say that it was a bit shocking. As a result, the market pulled back broadly on the day.

So in today’s blog I deliver the full scoop on this market-moving report as well as last week’s other big economic headlines. However, before I get ahead of myself, I’d like to review some of the key takeaways from Wall Street last week:

With first-quarter earnings season kicking off today (Monday, April 8), I suspect that the breadth and power of the stock market will deteriorate. To prepare, let’s look at the 44 big blue chips that have been upgraded and downgraded in Portfolio Grader[1] last weekend—full details here[2].

Some of the biggest movers and shakers came from the healthcare sector. In particular, U.S. health insurers rallied after the government announced plans to ramp up Medicare spending. However, while many were quick to pile into these stocks, I see this as jumping the gun—find out why here[3].

On the other hand, another pocket of the healthcare sector shows great promise. The generics drugs business is forecast to be the single fastest-growing industry for the next several years. So I’ve handpicked three stocks that are profiting from this trend in a big way—find out which here[4].

I explained why this is not the year to “Sell in May, and go away.” That being said, I understand why the temptation to flee may be strong, so this week I’ve laid out a five-step plan to survive any summer selloffs—full details here[5].

And now on to the important economic news:

The Housing Recovery

In February, construction spending grew 1.2% to an annual rate of $885.1 billion. This came well above economists’ estimates of a 0.4% rise and represented a reversal from the 2.1% decline we saw in January. The rise was driven by a 1.3% boost in spending for private construction. Meanwhile, public construction spending climbed 0.9%. Breaking it down further, housing spending advanced 2.2% to a $303.4 billion annual pace—the highest since 2008. Thanks to record-low borrowing costs and home building being at a four-year high, construction spending outpaced expectations. Over the past 12 months, spending has increased about 6.6%—and given that demand for housing is still on the rise, this trend should continue.

The Private Sector

In February, new orders for factory goods rose 3%—the biggest gain in five months. This also topped the consensus estimate, which called for a 2.5% gain in orders. This was largely thanks to a 95% surge in commercial aircraft orders, which tend to swing pretty wildly. But when you exclude aircraft, orders for non-defense capital goods—a measure for business confidence—declined 3.2%. Then again, this core measure has jumped around lately; it gapped up 6.7% last month. My key takeaway from this report was that it was largely positive: Orders for durable goods rose a robust 5.6% in February while non-durable goods orders rose 0.8%. Overall, due to a resurging manufacturing sector and inventory rebuilding, first-quarter GDP growth is on track for at least a 3% annualized gain.

The Jobs Market

Last week, new jobless claims spiked 28,000 to an annual rate of 385,000. This represents a four-month high, which surprised economists because they had expected claims to decline to a rate of 340,000. Meanwhile, the four-week moving average jumped 11,250 to 354,250. Unfortunately, this report suggests that we could be headed towards a sharp deceleration in job creation. This was also confirmed on Wednesday when ADP reported that 158,000 private payroll jobs were created in March, substantially below economists’ consensus estimate of 215,000 jobs. And, as I’ll discuss momentarily, the unemployment rate report wasn’t particularly optimistic either.

In March, 88,000 just payroll jobs were created. This missed the consensus estimate by a wide margin, which had called for 190,000 jobs to be created. Interestingly enough, the unemployment rate still declined from 7.7% last month to 7.6%; that’s because 496,000 Americans left the workforce. So the labor participation rate dropped to 63.3%—the lowest level since 1979.

In fact, the only positive detail in this report was that January and February payrolls were revised significantly higher to 148,000 (up from 119,000) and 268,000 (up from 236,000). There’s no way to sugarcoat it—this was a pretty dismal report. Because so many are leaving the workforce, the drop in the unemployment rate was a pyrrhic victory. The jobs report made investors nervous, so this is what sent the indices down at Friday’s open.

International Trade

In February, the U.S. trade deficit unexpectedly narrowed from $44.5 billion to $43 billion; economists had expected the gap to widen to $46 billion. Last month, Americans imported the fewest barrels of crude oil since 1996, but this was offset by ramped up imports of consumer goods. So imports remained largely unchanged at $228.9 billion. Meanwhile, exports jumped 0.8% to $186 billion. Sales of fuel, motor vehicles and auto parts sparked the increase. Given the dollar’s recent gain against major world currencies, it’s somewhat surprising that exports are still on the rise. However, this is good news for American businesses on an otherwise down day.